Notes to Consolidated Financial Statements
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Notes to Consolidated Financial Statements
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3. Termination Fee, Goodwill Impairment and Special Charges
Termination Fee
On November 3, 1999, the Company and Warner-Lambert Company
entered into an agreement to combine the two companies in
a merger-of-equals transaction. On February 6, 2000, the merger
agreement was terminated. The Company recorded income of
$1,709,380,000 ($1,111,097,000 after-tax or $0.85 per share-diluted)
resulting from the receipt of a $1,800,000,000 termination fee provided
for under the merger agreement offset, in part, by certain
related expenses.
Goodwill Impairment
Based on projected profitability and future cash flows associated with
generic pharmaceuticals and the Solgar consumer health care product
line, it was determined that goodwill related to these product lines,
at December 31, 2000, was impaired. As a result, the Company
recorded a charge of $401,000,000 ($341,000,000 after-tax or
$0.26 per share-diluted) in 2000 to write down the carrying value
of goodwill, to fair value, based upon discounted future cash flows.
Special Charges:
Voluntary Market Withdrawals
In November 2000, the U.S. Food and Drug Administration (FDA)
requested that the pharmaceutical industry voluntarily stop producing
and distributing any products containing phenylpropanolamine
(PPA). The Company immediately ceased global production and
shipments of any products containing PPA and voluntarily withdrew
any such products from customer warehouses and retail store shelves.
As a result, the Company recorded a special charge of $80,000,000
($52,000,000 after-tax or $0.04 per share-diluted) to provide primarily
for product returns and the write-off of inventory. The Company
already had reformulated a majority of the products involved in the
voluntary market withdrawal and began shipping these products in
the United States at the end of November 2000. At December 31,
2000, approximately $49,552,000 of the accrual remained.
Product Discontinuations
During the 2000 fourth quarter, the Company recorded a special
charge of $267,000,000 ($173,000,000 after-tax or $0.13 per share-diluted)
related to the discontinuation of certain products manufactured
at the Company's Marietta, Pennsylvania, and Pearl River,
New York, facilities. Approximately $227,100,000 related to fixed
asset impairments and inventory write-offs, with the remainder of
the charge covering severance obligations, idle plant costs and
contract termination costs. At December 31, 2000, approximately
$39,900,000 of the accrual remained.
Restructuring Charge and Related Asset Impairments
In December 1998, the Company recorded a special charge for
restructuring and related asset impairments of $321,200,000
($224,800,000 after-tax or $0.17 per share-diluted) to recognize
the costs of the reorganization of the pharmaceutical and nutritional
supply chains (primarily in the Asian-Pacific and Latin American
regions), the reorganization of the U.S. pharmaceutical and consumer
health care distribution systems, and a reduction in personnel from
the globalization of certain business units. The reorganization of
the pharmaceutical and nutritional supply chains will result in the
closure of 14 plants (nine pharmaceutical and five nutritional).
The reorganization of the U.S. pharmaceutical and consumer health
care distribution systems resulted in the closure of three distribution
centers. The restructuring ultimately will result in the elimination of
3,600 positions offset, in part, by 1,000 newly created positions in the
same functions at other locations. The components of this charge
were as follows: (i) personnel costs of $119,975,000, (ii) noncash costs
for fixed asset write-offs of $115,225,000 and (iii) other closure/exit
costs of $86,000,000. The noncash costs of $115,225,000 reduced the
carrying value of the fixed assets to their estimated fair value, taking
into consideration depreciation expected during the transition
period, which was determined by experience with similar properties
and external appraisals. These fixed assets, with a fair value of
$11,575,000, have remained operational during the transition period
of obtaining the necessary regulatory approvals to relocate these
operations to new and existing facilities. Since these fixed assets have
remained in use, depreciation was not suspended and will be recognized
over the transition period. Other closure/exit costs are a direct
result of the restructuring plan. The majority of the other closure/exit
costs are anticipated to be paid after the facilities cease production
and prior to disposition. These costs include non-cancelable operating
leases, security, utilities, maintenance, property taxes and other
related costs that will be paid during the disposal period. Due to the
specialized nature of these facilities, the majority of the costs will be
paid over a two- to three-year period as product transfers are
approved by regulatory authorities and manufacturing sites are
closed. However, delays in obtaining certain regulatory approvals
and other closure delays will cause certain costs to be paid after
that period.
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